Inflation Update

There was a lot of doom and gloom talk in the media yesterday about the spike in inflation. Here’s a summary of the details that you might have missed.

Why now?

Stats Canada reported that annual inflation in March hit 3.3 per cent, which is a massive jump compared to 2.2 per cent in February. It’s also the largest year on year increase we’ve seen since September 2008.

Back in July 2008, inflation hit 3.4 per cent and at that time it was the highest we had seen since March 2003.

Core inflation for the year ending in March is sitting at 1.7 per cent, up from 0.9 per cent in February.

Break it down.

When looking at inflation, 2 numbers are considered the important indicators: 1. The Consumer Price Index (CPI) – which is essentially the annual rate of inflation, and 2. the Bank of Canada’s Core Index – referred to as core inflation. The CPI looks at the price of all items, whereas the Core Index excludes eight of the CPI’s most volatile components (fruit,vegetables, mortgage interest cost, natural gas, heating oil and fuels, gasoline, inter-city transportation, and tobacco products) as well as any effects of changes in taxes on the remaining components.

Specifically, here are the items that are costing you more:

Gasoline – + 18.9 per cent

Electricity – + 4.3 per cent

Food – + 3.7 per cent

Shelter costs – + 2.4 per cent

Recreation and education – + 2.3 per cent

The provinces with the largest increase in inflation were Nova Scotia (+3.9 per cent), Ontario (+3.6 per cent) and Quebec (+3.3 per cent).

The increase in the CPI is a result of sky rocketing energy prices. If we remove energy costs (gas, electricity and fuels) from the CPI, the annual increase for March is 2.4 per cent, up from 1.4 per cent in February.

The increase in core inflation can be attributed to higher prices for travel services, clothing, and the purchase of passenger vehicles.

What does this mean?

Inflation is an important economic indicator – it basically tells you how far your dollar will take you compared to last year. When prices start to increase at higher than expected rates, particularly if your income doesn’t match this increase, the money in your pocket is worth less.

Core inflation, is one of the main metrics the Bank of Canada looks at when deciding to increase interest rates. They try to keep core inflation below 2.0 percent and if it looks like it’s on an upward trajectory, the Bank of Canada will increase interest rates, which will decrease the amount of money in circulation in the economy, which intern will help to bring inflation back in line.